Once upon a time in MLP land, there was a great big tree, and it grew so tall that those beneath it couldn’t even see where it might stop. When the seasons shifted, the tree would drop various bits of change on those below, who occasionally took it as a sign that the sky was surely falling. Some MLP investors have also wrung their hands and felt such angst in recent weeks.
As Hinds Howard, CBRE vice president and senior financial analyst at CBRE Clarion Securities, described it in his mid-October update, indiscriminate selling and negative fund flows out of openend funds were rampant. On Oct. 13, MLPs declined 5%, which made it the 15th lowest single-day decline in the history of the MLP index.
“It was the worst day in an eight-day streak that saw the index decline 13%, making it one of the worst streaks we have seen in MLP land in terms of number of consecutive down days and the depth of the selloff,” Howard said. “The good news is that MLPs have been extremely resilient after corrections in years past.”
What’s been outfoxing the MLP denizens in recent weeks? Analysts at Westwood Group said three fundamental factors have impacted MLP performance: interest rates, commodity prices and risk premiums. Widening credit spreads among high-yield bonds and declining commodity—well, crude oil—prices have both been negatives in the sector. And fears of a global slowdown in the economy tend to drag down energy demand.
Seeing opportunity
But there’s a silver lining to all of this. Westwood Group and others see it as a buying opportunity. “We have seen this scenario play out in the past and are working diligently to optimize our portfolio’s overall reward-to-risk ratio. Through this time-tested process, we are adding to existing holdings that have fallen below our target weights and purchasing new holdings that are now trading at attractive valuation,” Westwood analysts wrote in a recent update. “As is usually the case in an emotionally driven decline, we are confident that this period will ultimately prove to be a good buying opportunity that will benefit our clients over the long term.”
So don’t fret too much, friends of this tax-advantaged business model. In the days since the early October freefall and subsubsequent “slaughter” on the MLP market, MLPs have snapped back into shape more than once already.
Proving up the analysts who study this sort of thing, consolidations could actually overshadow the declines to be the true theme for MLPs this season.
At the beginning of October, Enterprise Product Partners LP made a $5.8 billion bid for Oiltanking Partners LP, a company “with an asset footprint so heavily integrated” with Enterprise that it could almost be considered organic growth, said analysts at Tudor, Pickering, Holt & Co. (TPH). The Houston-based Enterprise-Oiltanking deal was followed up by Targa Resources Inc.’s announcement that it will acquire Atlas Energy LP and Atlas Pipeline Partners LP in a $7.7 billion deal.
And by the third week of October, there was a third mergers and acquisitions (M&A) deal in the midstream space to keep the “unprecedented M&A tempo” that analysts at TPH noted. Tesoro Logistics LP announced its plan to acquire QEP Field Services for about $2.5 billion, including 58% ownership in QEP Midstream Partners LP.
Midstream M&A
“We are in a ‘golden age of M&A’ [in the midstream] as low capital costs [and] competition for opportunities drive consolidation,” they said.
And if all that isn’t enough to get MLP investors out of the doldrums, there’s this: Last year set a record for the MLP business, with 21 MLPs filing IPOs—and by mid-October, a 15th MLP had filed its S-1 paperwork this year to become a public partnership. Shell Midstream Partners LP, an MLP branch of Royal Dutch Shell Plc, launched its IPO with 37.5 million common units expected to raise $787.5 million. The MLP’s assets include a 43% stake in the Zydeco Pipeline Co., which owns the Houston to Houma (Ho-Ho) oil pipeline; 28.6% in a pipeline to the offshore Mars field in the Gulf of Mexico and a 49% holding in the refined products line of Bengal Pipeline Co. LLC in Louisiana.
So what’s the moral of the story? Things typically work out in MLP land, if you just believe—and hire a good financial advisor.
Deon Daugherty can be reached at ddaugherty@hartenergy.com or 713-260-1065.
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